Capital, Capitalists and Capitalism (Part II)

Editor’s note: The following is the second installment of the FrontPage series “Capital, Capitalists and Capitalism” by Dr. Mark Hendrickson. For Part I, click here.

Capitalist. “A person who has capital…invested in business enterprises.”1

All societies use capital, so every society has capitalists. They are those who decide who, how, where, and when the various forms of capital are used. In a socialist society, the government controls most of the capital. What socialist and other leftist writers despise are capitalists who have some independence from the state. It is the non-socialist owner of capital—the genuine capitalist rather than his pale socialists imitators—that is our focus in this article.

Anyone who saves part of his income and invests it in a productive enterprise—whether his own, a relative’s, or that of a total stranger via a bank or other financial intermediary—is a capitalist.

Historically, though, the term capitalist referred to entrepreneurs who used capital (either their own or capital borrowed from others) to produce goods and/or services that consumers wanted. Although capital clearly enhanced the productivity of labor, and so gradually raised workers’ wages and standards of living, capitalists themselves rarely have been depicted as heroes. On the contrary, they often have been despised, distrusted, resented, denounced, vilified, and hated.

In the excellent collection of essays Capitalism and the Historians, Bertrand de Jouvenel captured this irony, writing, “Strangely enough, the fall from favor of the money-maker [i.e., the portion of entrepreneurs who proved capable of using capital to earn profits] coincides with an increase in his social usefulness.”2 Counter-intuitively, the more wealth that capitalists produced and the higher standards of living rose, the more capitalists were cast as villains. This is doubly ironic in light of the contrast between the capitalist era of workers’ rising (however unevenly) standards of living and the pre-capitalist era when laborers were trapped in lives of abject poverty by a rigged, rigid economic system.

Who objected most strongly to the capitalists? It was not, at the outset, their employees, most of whom—though perhaps prone to grumbling about work, as most humans do at one time or another—had at least a dim recognition that capitalist-provided jobs improved their life prospects.

Initially, the attacks against capitalists came primarily from the prosperous, comfortable strata of society—ladies, gentlemen, and aristocrats. In England, the prominent critics of capitalists included William Blake (the poet whose famous poem Jerusalem referred to “those dark, satanic mills”); Blake’s fellow poet, Elizabeth Barrett Browning; the novelist, Charles Dickens, and numerous others who themselves were not members of the laboring class. Notice that these critics were writers. Indeed, the reputation of capitalists was shaped at least in part by the written word, which has proven to be the primary lens through which subsequent generations have perceived the early capitalists.

The recorded criticisms of the early capitalists and their factories are as problematical as they were influential. They were factually correct in certain important particulars, such as the long work hours, often unpleasant, if not deplorable, conditions, and meager wages, but they suffered from two significant defects: They were sorely lacking in context and often based on hearsay rather than first-hand knowledge.

Typical of the latter was Lord Shaftesbury, who (much like Marx and Lenin later on) energetically criticized the factory system while declining invitations to visit mill factories to observe working conditions first-hand.3 In another stereotypical anecdote, six of nine doctors summoned to testify about child labor and factory conditions before the 1816 Peel Commission (chaired by Robert Peel, the elder, not his son, the eventual Prime Minister) admitted that they had no personal knowledge of factories, but formed their opinions based on hearsay.4

Individuals who actually had first-hand knowledge of the factories had a more benign sense of them: Physicians with first-hand experience of factory conditions testified that children working in the factories “were at least as healthy as children not employed in factories.”5 The wages paid to workers in cotton textile factories, “with proper economy and forethought, would enable them to live comfortably… and the labor of children in those factories generally is light that falls to their share.”6

In terms of context, the genteel critics of early English capitalists often accused them of taking people away from happy lives in the countryside and plunking them down in noxious factories. In fact, according to a contemporary observer, William Cooke Taylor, “Compared to the factory workers, the agricultural laborers lived in abject poverty, and the work to which country children were put was far more exhausting than factory labor”; furthermore, many children in the countryside starved.7

The economist Ludwig von Mises explained the actual situation thusly: “The factory owners did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wage rates were, they were nonetheless much more than these paupers could earn in any other field open to them. It is a distortion of facts to say that the factories carried off the housewives from the nurseries and the kitchens and the children from their play. These women had nothing to cook with and to feed their children. These children were destitute and starving. Their only refuge was the factory. It saved them, in the strict sense of the term, from death by starvation.”8

Population data from that era tend to corroborate Mises’ assertion. The death rate of London children under the age of five was 74% from 1730 to 1750, before the advent of the factory system. Two generations later, from 1810 to1830 when the factory system was well established, that death rate had fallen below 32%. The population of England doubled from 1752 to 1820—striking evidence of longer life expectancy.9

In what hindsight shows to have been a strategic error, the early capitalists did not mount a vigorous defense against the lurid, fallacious charges of their critics. The economist W.H. Hutt thought that the reason for this was that “the mill owners were, if anything, apathetic toward the anti-factory propaganda” because they didn’t think it was possible that people would be gullible enough to believe the absurdly exaggerated claims.10

The factory workers themselves did not leave much of a written record of their thoughts about capitalists, but it is significant how they “voted with their feet.” They freely flocked to factories seeking employment, much as people in Third World countries form blocks-long lines to apply for jobs in sweatshops today.11 We can infer from this that factory work offered these people an improvement in their quality of life. Also, “If the British workers really thought they were being unfairly abused by capitalists, why did they not embrace en masse the Marxist message of exploitation that was current in Britain in the mid-19th century?”12

Granted, life for workers employed by capitalists often has been difficult, especially in the earlier stages of economic development; and yes, some capitalists undoubtedly have been mean and nasty (and so have some intellectuals), but the overall impact of capitalists on workers has been to increase their survival rates and longevity and to raise their standard of living.

That is the big picture. Up close and personal, holding a positive opinion of an individual capitalist can be challenging. Whatever the overall benefit of capitalists in general may be, it is easy to despise a capitalist who seems remote, uncaring, and, most of all, stingy in compensating his employees.

The public perception of capitalists in the United States during the golden age of entrepreneurial capitalist titans (roughly 1875 to 1925) was quite mixed. Some workers respected, and even loved, their capitalist employers. One notable example of this was George Westinghouse, who treated employees with uncommon kindness, generosity, and dignity.13 Other capitalists were despised and resented by their employees. The poster child for this group is Andrew Carnegie.14

Let us, for the sake of argument, concede that all the capitalists in the past were unnecessarily stingy toward their workers and paid them far less than they could have. By paying workers less, they were able to sell their products for lower prices. Lower prices for consumer goods makes goods more affordable, so part of what workers didn’t receive as wages, they received in the form of lower consumer prices. There were other social benefits, too, to the enormous profits earned by the mega-capitalists. The more profits they earned, the faster the social stock of capital accumulated. True, many capitalists indulged in large mansions and other luxury items (which, by the way, provided employment for workers who built and made those goods). But the most successful capitalists—the ones who employ large numbers of workers and make enormous fortunes supplying goods for the masses—couldn’t possibly consume most of their wealth. They saved millions, and the society’s stock of capital accelerated. This not only increased the productivity, wages, and standard of living of workers, but also provided capital for additional entrepreneurial ventures that increased employment opportunities for workers.

Like it or not, we living today are as affluent as we are because of the profits (capital) that those earlier capitalists did not pay out in wages to their employees. The low wages of the past contributed to the higher wages of today—hence, the hypocrisy of today’s intellectuals condemning long-dead capitalists even as they enjoy the benefits of their financial decisions.

The problem with the animus against capitalists is that those who denounce them are living in the past. The world has changed and rendered their objections moot. The salient fact of life that the anti-capitalists need to recognize today is that the conditions that made Andrew Carnegie’s stingy wages possible no longer exist.

Virtually all 19th-century capitalists had their employees over a barrel. Thanks to the pitiless, inexorable law of supply and demand, wages were low. The prevailing economic reality was that the supply of labor was abundant relative to the supply of capital. For capitalists, it was a buyer’s market. If Smith wasn’t willing to work for the wages offered, it didn’t matter, because Jones, Miller and Johnson were waiting in line to jump at the same opportunity.

Andrew Carnegie might have squeezed every penny he could out of his workers, but what enabled him to do so was the combination of a large supply of workers (not Carnegie’s fault) and the small number of capitalists wanting to hire workers in Pittsburgh (also not Carnegie’s fault). The main reason that workers wages did not rise faster than they did was not because capitalists like Carnegie were exploitative, but because there were not enough capitalists present to “exploit” (employ) all the workers who wanted jobs.

It is a basic economic fact of life that the law of supply and demand cuts both ways. While it leads to low wages when there is less demand for labor than the supply of workers, it also pushes wages higher when the demand for workers is high relative to the available supply of workers. In a market economy, if one wants workers’ wages to rise, one should not favor the abolition of capitalists, but the multiplication of capitalists. That would increase the competitive demand for workers relative to supply, and thus bid wages higher.15

At some point during the 20th century, a tipping point was passed. So many capitalist entrepreneurs arose that workers were no longer at the mercy of a small number of Carnegies, and workers’ incomes continued to rise, bringing a comfortable life of affluence within the reach of the vast majority of Americans. The middle-class standard of living enjoyed by millions of workers today includes modern conveniences that would be the envy of the kings and queens of just a few generations ago.

As wealth has multiplied, new industries have arisen from new technologies, and the financial industry that finances them has enjoyed explosive growth. A wide array of capitalist firms now provides more financial options than ever before. Today, unknown, would-be entrepreneurs have more opportunities to obtain funding than ever before. The result will be new products, services, and innovations that will enrich our lives in ways we can’t anticipate.

What has evolved over the last century is a democratization of capital. In fact, this important development largely removes one of Marx’ major objections to capitalists. Marx felt it was unfair that a laborer had to work for a capitalist and share his income with a capitalist “parasite.”16 The democratization of capital and credit makes it possible for workers themselves to obtain capital to go into business for themselves, thereby freeing himself from so-called “exploitation” by an employer.

Despite the inevitable phenomenon of “bad apples,” capitalists have played an indispensable, crucial role in helping our society advance to its present state of affluence. Today, though, it has become fashionable to denounce capitalists and capitalism itself due to the Big Bailout of Wall Street in 2008-9 and the obvious privileged treatment that some capitalist firms receive from Washington. Before condemning capitalists as a class, though, please recognize that those financiers and businesspersons who benefit from government intervention are not genuine capitalists, but counterfeits of capitalists. Genuine capitalists earn (or lose) their money in free, competitive markets where transactions and contracts are voluntary and capitalists have no power to rig the laws and regulations to guarantee profits for themselves. Those who receive bailouts and owe their financial success to government intervention are not true capitalists, and they are engaged in the sordid process of political rent-seeking, not in the practice of authentic capitalism. What is authentic capitalism? That will be explained in the following installments of this series.

2 Bertrand de Jouvenel, “The Treatment of Capitalism by Continental Intellectuals,” in F.A Hayek, ed., Capitalism and the Historians, Chicago, The University of Chicago Press, First Phoenix Edition, 1963, p. 109.

3 W.H.Hutt, “The Factory System of the Early Nineteenth Century” in Hayek, ed., Capitalism and the Historians, The University of Chicago Press, 1954, fn. 51, p.175.

Mark Hendrickson teaches economics at Grove City College. He writes the "No Panaceas" blog at Forbes.com and is a contributing editor of the St. Croix Review. Hendrickson's most recent book is "God and Man on Wall Street: The Conscience of Capitalism" with Craig Columbus.